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Despite PG&E Corp.'s decision to drop out of a partnership with El Paso Corp. for the Ruby Pipeline, which would carry Rocky Mountain natural gas to West Coast markets, El Paso remains "optimistic" about its prospects, the pipeline chief said last week. However, El Paso is "not committed yet" to moving forward, said Jim Yardley.

During a conference call to discuss quarterly earnings (see related story), Yardley appeared to anticipate questions from financial analysts about the fate of the proposed Ruby pipeline. Earlier in the week PG&E executives cited escalating costs in their decision to terminate a partnership on the gas pipeline. However, Yardley reiterated that the precedent shipping agreement with PG&E's utility, Pacific Gas and Electric Co., remains in place.

"We are convinced of the macro logic of the Ruby pipeline," Yardley told analysts. The northwestern United States "relies on Canada for gas supplies, and with imports declining, accessing the Rockies is a natural. Clearly, Rockies producers need more export capacity...PG&E, the utility, remains committed to the contract, not the parent...And we are in front of the producing community now, [and] we are active with several producers on capacity. We continue to make progress on the marketing front."

El Paso late last year filed a right-of-way application with the Bureau of Land Management for the Ruby Pipeline project, a 680-mile, 42-inch diameter pipeline that would begin at the Opal Hub in Wyoming and terminate at the Malin, OR, interconnect near California's northern border (see NGI, Dec. 4, 2007). Ruby would have an initial capacity of 1.2 Bcf/d and be expandable to 2 Bcf/d. El Paso initially estimated construction costs at around $2 billion.

The PG&E utility a few weeks later inked an agreement with El Paso for 375,000 Dth/d of long-term transportation capacity over 15 years (see NGI, Jan. 7), and a binding open season for the pipe was launched by El Paso in February (see NGI,Feb. 25).

As to why PG&E terminated its partnership, CEO Peter Darbee said last week it was all about the costs.

"During the recent weeks and months, we have taken the opportunity to examine very carefully the costs associated with that pipeline [proposal] in the course of our due diligence efforts," Darbee said during a quarterly earnings conference call. "Not surprisingly and consistent with what we have said previously, we see the price of steel and pipe and construction overall rising very substantially. With this backdrop of what is happening in the industry [and comparing them to] projections for the Ruby pipeline, we found a disconnect.

"We frankly do not agree with the cost projections at the current levels being realistically achievable. So we have exercised our option to pull out, and we will no longer have any further participation at PG&E Corp. in the pipeline, but the [utility] will continue to interact with El Paso regarding this pipeline, and the decision as to whether the Ruby project will continue is up to El Paso and its board of directors."

Yardley agreed that prices for pipeline building materials have escalated in recent months.

"We are very conscious of the market for steel contractors, etc., the inflation for Ruby as well as other projects," he said. "Clearly, costs have increased since we began working on Ruby more than a year ago. Steel costs have escalated yet again...coking, scrap metals costs...So we are looking hard at the risk proposition of Ruby, how to manage the risks. We want Ruby to happen and we think we can make it happen. Northwest customers also have a vested interest in seeing it succeed. But we will only go forward if there is an acceptable return on the project."

PG&E still thinks it would be "useful to have access to the Rockies" in addition to its supplies from Western Canada and the Southwest through its connection with El Paso at the Arizona border, said Darbee. And PG&E still will seek Rockies supplies, either through Ruby or one of the competing pipeline proposals, he said.

El Paso spokesperson Bruce Connery reiterated to NGI last week that the pipeline's commercial operations would begin in 2011 if the pipeline is fully subscribed. In the meantime, El Paso plans to seek other partners, Connery said. The Bear Stearns Companies Inc.'s Bear Energy LP had indicated it wanted to be involved in the pipeline, but Bear Stearns is now merging with JPMorgan Chase, and its involvement is questionable.

Williams and TransCanada in March proposed the Rockies east-to-west Sunstone Pipeline to move gas supplies to the West Coast (see NGI, March 17). Last week Williams and Puget Sound Energy enhanced the Sunstone project by launching an open season to test shipper interest in the proposed Blue Bridge Pipeline, which would increase access to the Sunstone pipe for West Coast markets (see related story). Spectra Energy also is testing interest in its proposed Bronco Pipeline. Earlier this year Spectra launched an open season to test market support for its pipe, which would move gas from the Rockies to the Pacific Northwest and California (see NGI, Jan. 14).

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About NGI

Natural Gas Intelligence (NGI), is a leading provider of natural gas, shale news and market information for the deregulated North American natural gas industry. Since the first issue of Natural Gas Intelligence was published in 1981, NGI has provided key pricing and data relied upon daily by thousands of industry participants in the U.S, Canada and Mexico as well as Central and South America, Europe and Asia.